How to plan for Inheritance Tax

Previously, we looked at Inheritance Tax Planning: Maximising Your Legacy, but now we turn our focus to the practical steps on how to plan for inheritance tax (IHT) effectively. This article aims to simplify the complexities of IHT, offering strategies to pass on your wealth to the next generation in the most tax-efficient manner possible. Utilising gifts, trusts, and understanding key thresholds can significantly reduce IHT liabilities.

Utilising the Nil-Rate Band

The inheritance tax threshold and the nil-rate band. Currently, the IHT threshold stands at £325,000, meaning estates valued below this amount are exempt from IHT. For estates exceeding this value, the standard IHT rate is 40%. However, the introduction of the residence nil-rate band (RNRB), currently at £175,000, provides an additional allowance when a residence is passed on to direct descendants, potentially raising the tax-free threshold to £500,000 for individuals.

Remember that there is no inheritance tax on assets passed on death to a spouse, so married couples can benefit from up to £1m of IHT allowances.  

Impact of the residence nil-rate band on IHT liabilities

The table below illustrates the impact of claiming the full RNRB on IHT liabilities for different estate values:

Total Value of Estate	IHT Payable with Full RNRB Claimed	IHT Payable with No RNRB
£325,000	None	None
£400,000	None	£30,000
£500,000	None	£70,000
£600,000	£40,000	£110,000
£800,000	£120,000	£190,000
£1 million	£200,000	£270,000

This table highlights the significant tax savings achievable through effective use of the RNRB, underscoring the importance of strategic estate planning.

Strategies for Inheritance Tax Reduction

• Lifetime Gifts: Gifting assets more than seven years before your death can exclude them from your estate’s IHT valuation. The £3,000 annual exemption and the small gifts exemption (up to £250 per person) are key for reducing your estate’s inheritance tax liability.
• Trusts: Trust are strategic for asset distribution after death, potentially lowering IHT. Various trusts offer different benefits, allowing for customised estate planning.
• Life Insurance Policies: Life insurance, when placed in trust, doesn’t count towards your estate for IHT. This ensures beneficiaries have a sum available upon your death, which is useful for covering IHT liabilities.
• Charitable Donations: Money left to charities is IHT-exempt. Donating at least 10% of your net estate to charity can lower the IHT rate on the rest of your estate from 40% to 36%.

Utilising your pension.

Being generally exempt from the estate for IHT calculations, pensions serve as a vital means for transferring wealth to heirs. It’s essential to keep pension nomination forms current.

Typically, pensions do not form part of an individual’s estate for the purposes of inheritance tax. Nonetheless, other tax implications, such as income tax, may arise. The remaining pension funds of the deceased can be distributed to beneficiaries either as a one-time sum or through periodic payments. The tax implications depend on the age at which the person passed away:

• Should the individual pass before reaching 75, the disbursed funds are usually exempt from tax.
• For deaths occurring post-75, the distributed amounts will incur taxes according to the beneficiary’s personal tax situation.

Valuing an Estate for Inheritance Tax

Valuing an estate for IHT involves a comprehensive assessment of all the assets owned at the time of death. This includes property, investments, cash, and personal belongings, among others. It’s crucial to accurately calculate the total value to determine the IHT liability. This process includes:

• Gathering Asset Information: Compile detailed information on all assets. This includes bank accounts, real estate, stocks, and personal items of significant value.
• Debts and Liabilities: Subtract any outstanding debts, including mortgages, loans, and funeral expenses, from the total asset value.
• Jointly Owned Assets: Evaluate the deceased’s share in jointly owned assets, as only this portion is considered for their estate’s IHT calculation.

When do you pay inheritance tax?

IHT is due within six months from the end of the month in which the death occurred. Payments made after this period may accrue interest. However, planning ahead can reduce or delay the tax due.

Ready to Enhance Your Inheritance Tax Planning?

Our team of experts is here to guide you through every step, from valuing your estate accurately to improving your tax position to ensuring your legacy is preserved.